How to Pay Yourself as a Business Owner
Quick Answer
How you pay yourself depends on your business structure. Sole proprietors take owner's draws (not subject to payroll processing). S-Corp owners pay themselves a salary plus distributions. The key tax difference is that draws and all sole proprietor income is subject to the 15.3% self-employment tax, while S-Corp distributions are not — making the S-Corp election potentially worth thousands in tax savings for profitable businesses.
Payment Methods by Business Structure
| Structure | How You Pay Yourself | SE Tax Applies? |
|---|---|---|
| Sole Proprietor | Owner's draw | Yes, on all net profit |
| Single-Member LLC | Owner's draw (default) | Yes, on all net profit |
| S-Corp / LLC w/ S-Corp election | Salary + distributions | Salary: yes. Distributions: no |
| Partnership | Guaranteed payment + distributions | Depends on arrangement |
| C-Corp | Salary + dividends | Salary: yes (FICA). Dividends: no SE tax |
Real Example With Actual Numbers
Elena runs a consulting business earning $150,000 in net profit. She lives in Florida. Compare the two most common structures:
As Sole Proprietor (Owner's Draw)
| Tax | Amount |
|---|---|
| Self-employment tax (15.3% on $138,525) | $21,194 |
| Federal income tax (after SE deduction) | ~$17,400 |
| Total tax | ~$38,594 |
As S-Corp (Salary $80,000 + Distribution $70,000)
| Tax | Amount |
|---|---|
| Payroll tax on salary (15.3% of $80,000)* | $12,240 |
| Federal income tax on total $150,000 | ~$18,200 |
| Total tax | ~$30,440 |
*Split between Elena (7.65%) and her S-Corp (7.65%)
S-Corp savings: ~$8,154 per year — primarily from avoiding self-employment tax on the $70,000 in distributions.
However, S-Corps have additional costs: payroll processing ($500-$2,000/year), a separate tax return ($500-$1,500 CPA fees), and state filing requirements. The breakeven is typically around $60,000-$80,000 in net profit.
Use the freelance calculator to estimate your taxes under different structures.
The "Reasonable Salary" Requirement
If you elect S-Corp status, you must pay yourself a "reasonable salary" — what someone in a similar role would earn. The IRS watches for S-Corp owners who set artificially low salaries to minimize payroll taxes.
General guidelines:
- Your salary should be at least 40-60% of net business income
- Compare to industry salary data for your role
- Document your rationale
When to Consider Each Structure
Stay as Sole Proprietor If:
- Net profit is under $50,000-$60,000
- Your business is simple and low-overhead
- You want minimal paperwork
- You file Schedule C and pay quarterly estimates
Elect S-Corp If:
- Net profit consistently exceeds $70,000+
- The SE tax savings outweigh the extra filing costs
- You can determine a reasonable salary
- You are willing to run payroll
Consider LLC vs Sole Proprietor
An LLC provides liability protection but, as a single-member LLC, is taxed identically to a sole proprietor unless you make an S-Corp election. See sole proprietor vs LLC.
Practical Steps
- Open a separate business bank account — Required for S-Corps, strongly recommended for all
- Decide on a draw schedule — Pay yourself regularly (weekly, biweekly, or monthly) for budgeting consistency
- Set aside tax reserves — Whether you draw or pay salary, reserve 25-35% of income for taxes
- Make quarterly estimated payments — The IRS expects payments four times per year
- Track everything — Maintain clear records of all draws, salary payments, and distributions
Compare your options using the freelance calculator or see how a W-2 salary compares at the SalaryHog calculator.